Business Tax Strategies: What Works and What Doesn’t
It’s the middle of December and it’s time for Solopreneurs and all freelancers to think about how much money we’ll be giving to the tax man this year. Tax planning is often a priority as the year winds down, but keep in mind that obsessing over taxes isn’t always helpful. New York City CPA and small business tax specialist Michael Hanley recommends that you pause and carefully assess the impact aggressive tax strategies would have on your financial circumstances.
Hanley warns small business owners and Solopreneurs against spending inflated business expenses to lower the tax bill, because deductions are not a dollar-for-dollar benefit. Every dollar written off as a deduction produces on average only 30 cents in tax savings (depending on your tax bracket and the legal structure of the business). If you have an expensive item to buy and you anticipate that this year’s and next year’s income will be about the same, shop when you can get the best price on the item, either this year or next. Your savings could be worth more than the deduction.
Hanley also addresses the seemingly common tactic of zeroing out the business bank account by December 31st. Paying for business expenses, adding to your retirement account, or buying business equipment or supplies could make the zero bank account balance tactic work. Paying yourself a bonus, receiving a shareholder distribution if your business is a corporate entity, paying off your line of credit at the bank, or paying off business credit cards will not give you legitimate deductions.
Professional development education is tax deductible, so if you have the money and a potentially useful workshop or symposium is being offered late in the year or early in the new year, register and pay on or before December 31st. Adding a certification to your resume can make your services appear more valuable to clients and can also justify an increase in your hourly rate and project rate.
You might also consider hosting a holiday party for select clients, prospects, referral sources, and business colleagues (ie, no one who can steal a client!). The party expenses will be tax deductible and, best of all, it could turn into a networking bonanza that generates billable hours for you in the next year and beyond.
Customers and referral sources could also get more business and that will make your relationship with you more valuable to them. If you can occupy a large table or private room at a restaurant that doesn’t have to be fancy, but has a good reputation, plan your party and use Evita for the invitation and RSVP. Please allow 7-10 days for responses; last minute invitations may be fine. Spontaneity has its charms, especially this time of year.
Invite 30 guests and expect 10 to show up. Prepare five or six sandwiches and host a signature cocktail party. If someone orders beer or wine, let them. Your party can take place from 6:00 pm to 8:00 pm Most people will have two drinks, the restaurant will tell you how much food to prepare. You’ll probably spend $60 per person, which means a table of 10 will cost around $750.
You might also consider throwing a party for your Linked-In connections. It would be a wonderful way to introduce your colleagues to each other and billable hours could be created as a result. You might want to make this a pizza, salad, beer and wine affair, but so what? It’s a great idea, regardless. If you have 100 connections, plan on 25 showing up.
If it’s too late to throw a party this year, the cards and stamps used for the December greetings you send to clients and referral sources are tax deductible. Also, if certain clients have given you a generous amount of billable hours, perhaps with an ongoing advance, then send those clients a gift. Confirm with the company’s human resources department that corporate gifts are allowed and if there is a maximum number of gifts. The gift will enhance the relationship and is also tax deductible.
Thank you for reading,
kim
